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Value-at-risk and extreme returns

Danielsson, Jon and Vries, Casper (1997) Value-at-risk and extreme returns. Financial Markets Group Discussion Papers (273). Financial Markets Group, The London School of Economics and Political Science, London, UK.

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Accurate prediction of extreme events are of primary importance in many financial applications. The properties of historical simulation and RiskMetrics techniques for computing Value-at-Risk (VaR) are compared with a method which involves modelling the tails of financial returns explicitly with a tail estimator. The methods are compared using a sample of U. S. stock returns. For predictions of low probability worst outcomes, RiskMetrics type analysis underpredicts while historical simulation overpredicts. However, the estimates obtained from applying the tail estimator are more accurate in the VaR prediction. This implies that capital requirements can be lower by doing VaR with the tail estimator.

Item Type: Monograph (Discussion Paper)
Official URL:
Additional Information: © 1997 The Authors
Divisions: Finance
Subjects: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G0 - General > G00 - General
G - Financial Economics > G1 - General Financial Markets > G10 - General
Date Deposited: 05 Jun 2023 13:33
Last Modified: 23 Feb 2024 13:24

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